In a joint letter sent to SEC Chairman Mary Jo White on July 22nd, 2013, Rep. Patrick McHenry (R-NC) and Rep. Scott Garrett (R-NJ) raised serious concerns over the proposed implementation of Title II and the lifting of the ban on general solicitation for private placement offerings under new rule 506(c) of Regulation D.
Rule 506(c) specifies a framework under which issuers would, for the first time, be allowed to advertise private placements to the general public. Participation in these offerings would be limited to accredited investors and include more robust requirements by which investors and intermediaries would be required to confirm accredited investor status.
The letter, sent on behalf of the House Financial Services Committee, take particular issue with a proposed rule requiring a Form D filing 15 days in advance of any solicitation or advertisement. From the letter, emphasis ours…
The primary concern arising from the Proposed Rules results from an apparent error that the Commission made when drafting this proposal. Proposed Rule 503 requires a fifteen day waiting period, after filing Form D, before allowing any advertisements – this restriction appears to violate the law by imposing a fifteen day ban on general solicitation. Title II of the JOBS Act lifted the ban on general solicitation for Regulation D 506 offerings to accredited investors. As a result, the Form D pre-filing requirement effectively violates Title II of the JOBS Act.
The letter goes on to explain that issuers without access to sophisticated legal counsel may have to wait longer than 15 days in order to ensure they remain on the right side of rules implemented by the SEC.
This is a concern that has been raised time and time again throughout the increasingly long and arduous process of JOBS Act implementation. The ethos of the JOBS Act was to increase activity in the private marketplace among both accredited and non-accredited investors. Some have raised concerns that bureaucratic hurdles put in place by the SEC counter the aim of the bill, and that could undermine the overarching point of the JOBS Act.
In summary, the letter clarifies that the JOBS Act “did not say that the Commission can delay free speech for fifteen days.” It points out that these burdens translate to increased cost for careful issuers.
There is also concern over Proposed Rule 509, which mandates standard disclosures to be paired with general advertisements for these private placements. In practice, for example, it has been pointed out that those disclosures wouldn’t fit into 140 characters, essentially rendering Twitter useless in general solicitation.
When considering the dual mandate of the SEC – facilitating capital formation in the markets while protecting investors – it’s easy to see why the proposed rules were crafted in the way they were. However, the message from legislators is clear: mandates contained within the JOBS Act were congressional mandates, and the intent of those mandates should not be undermined by regulatory burdens imposed by bureaucrats in Washington.
In addition to voicing their concerns, the Representatives also requested more information on expenditures within the SEC in crafting the proposed rule outlining Form D filings in advance of solicitation. In her response, SEC Chairman Mary Jo White estimated costs at 3,258 staff hours and $315,574.
As you know, the JOBS Act, required a significant change in the Rule 506 marketplace by mandating that the Commission eliminate the ban on general solicitation in Rule 506 securities offerings. As I stated on July 10, 2013 at the Open Commission Meeting, I believe that the Commission had a responsibility to implement this Congressional mandate expeditiously. I also believe, however, that in connection with the implementation of this JOBS Act mandate, the Commission should closely monitor and collect data on the changes to the Rule 506 market to, among other things, assess whether non-accredited investors are participating in this market, observe the practices the issuers and market participants are using, evaluate whether the changes are creating new capital raising opportunities, and assess whether and to what extent the changes in the private offering market lead to additional fraud.Mark Jo White, SEC Chair
Chairman White says that the letter from the Representatives will be filed as public comment and the concerns will be considered in advance of rules taking effect, but she clarifies that the rule will not be withdrawn as the Administrative Procedure Act specifies a public comment period on proposed rules. Until that period ends it is unlikely the SEC would make any preemptive changes to proposed rules.
If the rules are implemented as they stand, it could prime Congress to act quickly on a second version of the JOBS Act to address some of the perceived shortcomings in implementation from within the SEC. Stay tuned.